Wednesday, September 17, 2008

My posting to a Fox Business blog

As you correctly pointed out the Fed acted under Section 13, paragraph 3 of the Federal Reserve Act, which states:

“In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal Reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe.”

Here’s the link:

That means they can “discount” (or lend against) anything they want. So, the Fed is clearly within its powers to do what it did.

Second, the Fed’s Maiden Lane Portfolio, which contains the assets of Bear Stearns that were originally valued at $28.8 billion, is now up to $29.33 billion as of last Thursday. If they did “unload” it they’d have a nice profit of over $500 million. Here’s the link:

Finally, David Rosenberg's comment that "the money supply has just been expanded by $85 billion" is incorrect (if that's what he actually said). While reserves in the banking system (this is not part of money supply) will rise by $85 billion due to the loan to AIG, the Fed has instructed the Treasury to sell $40 billion of new T-Bills. This reserve maintenance operation is designed to reduce those level of reserves.

To date, despite all the lending the Fed has conducted, total bank reserves stand $500 million less than where they were in August 2007 and excess reserves are down more than 50% from where they were. Mr. Rosenberg clearly does not understand monetary operations and how the Fed uses that to maintain a level of reserves that anchors its funds rate.

Moreover, M2 is growing at below 5% annually, far below the 12.5 percent growth rate after 9/11. Other monetary aggregates, like the monetary base, something that the Fed has most control over, is not growing at all, and total bank credit is also expanding very slowly.

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